Archives for February 2016

Markets closed out another solid week of gains on the back of higher oil prices and some positive economic data. For the week, the S&P 500 increased 1.58%, the Dow grew 1.51%, and the NASDAQ added 1.91%.[i]

Investors got their second look at fourth-quarter 2015 Gross Domestic Product (GDP) last week. The latest data shows that the economy grew 1.0% last quarter versus the 0.7% originally reported. Economists had forecast a drop in GDP growth to 0.4%, so the increase was a welcome surprise and helped tamp down recession worries.[ii]

In another positive sign, consumer spending rose steadily in January and inflation increased closer to the Federal Reserve target of 2.0%. These encouraging indicators could support another rate hike since they bolster the growth picture for this year.[iii] Though the Fed could technically raise rates at the next meeting in March, most economists don’t expect to see higher rates until June at the earliest.[iv]

Though we expect volatility to continue over the next weeks and months, one contributor to volatility may be losing its grip. Over the last few months, U.S. equities have followed Chinese stocks over the edge, responding to worries about the health of the world’s second-largest economy. However, last week, though Chinese equities tumbled again, American stocks closed out the week positive. The divergence is a relief because it could indicate that the short-term connection between U.S. and Chinese markets is breaking down as investors return to fundamentals.[v]

Does this mean that what happens in China will cease to affect American investors? Probably not, but we can hope that investors stop worrying about every little twitch in China’s markets.

The week ahead holds more economic data, the highlight being the February jobs report that comes out on Friday. Based on the weekly gains reported so far, we’re expecting a solid showing and hoping for continued increases in wages, which could help boost consumer spending this year. Investors will be looking for signs that the domestic economy can withstand trouble abroad and hoping for signs of increased economic activity in the first quarter of 2016. Election-year politicking may add uncertainty when votes are tallied on Super Tuesday this year.

New home sales fall sharply. Sales of newly built homes plummeted from a 10-month high in January. However, the fall seems to be largely because of unusually low activity in the West and the overall housing market appears to be healthy.[vi]

Consumer confidence declines in February. A measure of how Americans feel about the economy fell last month as consumers grew more pessimistic about their financial prospects.[vii]

Durable goods orders rise. New orders for long-lasting manufactured goods like electronics, appliances, and vehicles rose in January by the most in 10 months. The uptick in demand is a positive sign for the manufacturing sector this quarter.[viii]

Jobless claims rise, but remain stable. The number of Americans filing claims for new unemployment benefits rose last week, but the overall trend remains positive. Continuing claims also fell, indicating that workers are finding jobs and moving off benefits.[ix]

Markets closed out their best week of the year last week, buoyed by higher oil prices and positive economic data that reassured some recession worriers. For the week, the S&P increased 2.84%, the Dow grew 2.62%, and the NASDAQ added 3.85%.[i]

After tumbling for weeks, oil prices stabilized close to $30/barrel after several major oil producers—including Saudi Arabia, Russia, Qatar, and Venezuela—announced their willingness to freeze production levels to fight low prices. It’s not clear that the deal will go anywhere since other countries are refusing to participate. [ii] Since cutting production will only work if all or most oil producers commit to collective action, it’s not certain that oil prices have ended their declines. However, the temporary pause was enough to give markets a boost.

A key barometer of prices in the U.S.—the Consumer Price Index—showed that core inflation rose 2.2% over the last 12 months.[iii] A modest rise is good news because it shows that there is demand pushing up prices. Demand means that the economy continues to grow. However, the increase is small enough that it’s not likely to trigger another interest rate increase by the Federal Reserve any time soon.

On the negative side, the current manufacturing picture is bleak. Two reports released last week show that the manufacturing sector is still contracting, a victim of a decline in global demand for manufactured goods. However, some portions of the sector that depend on domestic demand are doing well.[iv]

The official minutes from January’s Federal Reserve Open Market Committee meeting show that officials are concerned by how global risks may affect the domestic growth picture. This isn’t news to investors, and markets didn’t react very much to the release. Overall, the FOMC intends to be cautious in moving ahead with rate increases, though they are holding to their medium-term positive outlook on the U.S. economy.[v] We’re not likely to see a rate increase in March or April. Currently, the latest Wall Street Journal poll of economists shows June as the odds-on favorite for the next rate hike.[vi] We’re not holding our breath.

The week ahead is packed with important economic data, including the second release of fourth-quarter GDP, consumer sentiment, international trade, and consumer spending. Will last week’s optimism hold? Possibly, if we get more good news. However, it’s likely that we’ll see additional volatility in the days and weeks ahead.

Friday: GDP, International Trade in Goods, Personal Income and Outlays, Consumer Sentiment

HEADLINES:

Housing starts drop in January. Groundbreaking on new homes fell 3.8%, surprising economists who expected to see a rise. Seasonal factors like the large blizzard that blanketed the East Coast could be responsible.[vii]

Jobless claims fall unexpectedly. The number of Americans filing new claims for unemployment benefits fell last week, pointing to renewed strength in the labor market.[viii]

Mortgage applications rise on lower rates. Falling rates on mortgages continue to drive purchase applications and refinancing activity. Applications for home purchases are up 30% over the same period last year.[ix]

Home builders may be losing confidence. An indicator of optimism among the nation’s home builders shows that though current and future sales expectations are strong, a lack of labor and available lots may be dragging on future building.[x]

Markets ended another volatile week lower despite a bounce in oil prices. For the week, the S&P 500 lost 0.81%, the Dow fell 1.43%, and the NASDAQ dropped 0.59%.[i]

Amid volatile stock prices and disappointing global economic news, you may have heard a lot of chatter on media networks about whether the U.S. economy is facing another recession. In this week’s market update, we wanted to share our views.

Why is there so much talk about a recession?

With oil prices barreling below $27 amid a global slowdown, a lot of financial commentators are talking more seriously about the potential for a U.S. recession.[ii] These recession fears are not baseless and we’re taking them seriously.

Predicting a recession is always a difficult exercise because it relies on balancing positive and negative indicators, many of which are based on old data. We heard from Federal Reserve Chair Janet Yellen last week that the Fed sees a mixed economic picture ahead. She further warned that the U.S. economy could feel the effects of economic turmoil abroad.[iii] Though Fed economists aren’t currently worried about a recession, you can bet that they are taking a close look at potential recession triggers. What are they looking at?[iv]

Continued weakness in oil and commodity prices that are hurting energy producers.

Emerging market issues (particularly in China) that affect exports and U.S. firms.

Falling demand in the manufacturing sector.

Worries that central banks are out of bullets.

So, what’s the good news?

Despite all the doom and gloom in markets right now, the U.S. economy is not lying down and giving up. Here are a few of the things experts see in the pro-growth column: [v]

The economy is approaching full employment and employers are still hiring.

Wages are increasing, Americans are taking home bigger paychecks, and household savings are growing.

Consumers are still spending money on big-ticket items like electronics and motor vehicles.[vi]

S. exports to Brazil, Russia, India, and China — four of the largest emerging markets — totaled just 1.14% of U.S. GDP in 2014. That’s a drop in the bucket of total economic activity.[vii]

Will the economy slide into recession in 2016?

We don’t know, but we do know that recessions don’t just happen for no reason. As Yellen put it in her remarks to Congress: “The evidence suggests that expansions don’t die of old age.”[viii] In short, something has to happen to cause a recession and the Fed doesn’t see anything on the horizon yet.

That’s not to say that the economic picture is rosy. Economists are not predicting breakout growth in 2016. However, they’re also not predicting a recession. The Wall Street Journal forecasts first-quarter 2016 Gross Domestic Product (GDP) growth of 2.0%.[ix] The Atlanta Fed is more optimistic, predicting 2.7% growth.[x]

However, recession risk is rising; the latest Wall Street poll of economists put the risk of a recession in the next 12 months at 21%, double where it was in June.[xi] However, the same poll reported recession probabilities of 16% in January 2011 and 17% in January 2012.[xii] Neither year ushered in a recession. The reality is that we won’t know when a recession starts or ends until it has already happened, and there is no way to predict it with any certainty.

Our View

2016 has been a very rocky road for equities, and the volatility is likely to stick with us for a while. Bad news has dominated markets for weeks and we don’t know when sentiment will swing the other way. However, let’s remember that the current correction is coming after years of sustained growth.

We’re keeping a close eye on economic and market fundamentals and making investment decisions based on our analysis as well as our clients’ individual situations. We know that corrections are uncomfortable and that you may have questions about the economy and how it may affect your portfolio. If you have questions or concerns, please reach out to us directly, we’d be happy to talk to you.

Supreme Court Justice Scalia passes away. The conservative justice’s death leaves a gap in the nation’s highest court and ups the stakes in this year’s presidential election. It is not clear whether it will be President Obama or his successor who will nominate the next justice.[xiii]

Retail sales rise more than expected. Consumers spent more than forecasted in January across many categories of goods, easing fears about consumer spending this year.[xiv]

Consumer sentiment drops. Worries about the economy took their toll on a measure of consumer optimism though long-term prospects remain stable.[xv]

Chinese exports slump in January. China’s exports – a major driver of the economy – dropped 11.2% from the previous January. The fall was larger than forecast and highlights China’s growing economic woes.[xvi]

Markets dropped last week on mixed economic data and a big selloff in the tech sector amid weak earnings. For the week, the S&P 500 lost 3.10%, the Dow fell 1.59%, and the NASDAQ dropped 5.44%.[i]

In this week’s update, we wanted to dig deeper into a major economic indicator that drives market analysis and activity: the monthly jobs report. On Friday, investors got a look at January’s jobs report, which showed that the economy gained 151,000 jobs last month.[ii] The gains pushed the headline unemployment rate down to 4.9%, the lowest it has been since February 2008.[iii]

At 4.9% unemployment, the economy is now in the range of what economists call “full employment,” defined as a point at which the economy no longer faces demand-related job scarcity. At full employment, most (not all) job seekers can find and keep the jobs they want and employers can find the workers they need.[iv] This point should represent an ideal state for the labor market and a victory for the Federal Reserve.

While progress is great news, is the economy really at full employment?

One problem with “big picture” indicators is that they leave out a lot of detail and don’t capture the full complexity of the economy. The jobs market has been a riddle for some time; though we’ve seen consistent job creation since 2010, wage gains have been weak and the quality of jobs created is worse than that of previous post-recession periods.[v]

The jobs created after the 2001 recession were well-distributed among lower- and higher-wage industries; in contrast, the recent job recovery has been largely driven by lower-wage industries.[vi] For example, bars, restaurants, and retailers picked up 105,000 new workers last month, while white-collar jobs grew by just 9,000, the smallest gain in over two years.[vii] Another problem is that we have about 6 million people who want jobs and haven’t found them. Another 6 million are working part-time for economic reasons.[viii] Details like these matter to Americans and help explain some of the anxieties that remain about the labor market recovery.

Now – that’s not to say that the labor market hasn’t made significant progress over the last year. Wages increased by 2.5% over the last 12 months, which is consistent with growing demand for workers. Unemployment is down across the board, and job gains continue.

Bottom line: The January jobs report was basically positive, but we’re not ready to believe that the labor market is completely recovered. Though it’s clear structural issues remain, the data also doesn’t indicate that a recession is on the horizon.

This week, Fed Chair Janet Yellen’s testimony before Congress will be the highlight of the economic calendar. Analysts are expecting the House and Senate to grill her over the December rate hike and the Fed’s plans for further interest rate increases this year. Realistically, it’s not likely that Yellen will reveal much beyond the Fed’s intention to carefully weigh data, but it promises to be an interesting Q&A.[ix]

Cold weather freezes motor vehicle sales. U.S. automakers posted modest sales numbers in January as winter weather kept car shoppers out of car lots. However, underlying trends are still positive, indicating that Americans are still spending on big-ticket items.[x]

Consumer spending fell flat in December, but savings increase. Spending by U.S. consumers remained unchanged in December. However, a three-year high in savings growth could spell higher spending in the months to come.[xi]